1031 exchange? Sell triplex after only 6 months of owning it?

[Trina Pugmire]

We purchased our triplex in April of this year for $260,000, we put $41,000 into it for the remodel. Our plan was to live in one unit (house hack) for 2-3 years and then rent out all three units for the cash flow after that. We were just called by an investor who would potentially offer us $375,000. 1) Should we sell it for that much? Or more? 2) If we sell it, what are our options to not pay capital gains? Would we be able to pay ourselves back for the $41,000 we invested into it if we did something like 1031 exchange? 4) Any other comments/suggestions??

[Dave Foster]

@Trina Pugmire, The numbers will give you an answer.  But heres some things to think about.

1. @Michaela G. is right that most folks feel comfortable at more than a year holding period.  But there is no statutory holding period.  It must have been your intent to hold the property for productive use.  There are circumstances where a hold period of less than a year is still long enough to justify a shorter holding period - as long as you can demonstrate your intent.

2.An unsolicited offer is frequently used to demonstrate intent.  You didn't intend to sell but the size of the offer persuaded you  - pretty much like it sounds.

3. When you do your calculations keep in mind that you can't 1031 the portion you are living in.  And you haven't lived in it long enough to qualify for the primary residence exemption on that portion.  So you'll be paying tax on probably $25K of that gain and only getting to shelter $50K in the exchange.

4. The reinvestment requirements of the 1031 are that you must reinvest all the proceeds if you want to avoid all tax.  So you cannot get that $41K out of the sale without paying tax on it as if you pulled out profit.  Since the entire tax you'll be saving is only around $50K that wouldn't be worth it.  However since you're already going to pay tax on the $25K allocated to the primary side you just as well take that.  If you wanted the other $16 you would also pay tax on that.